Debt vs. Savings

[Starry436]

We have $7,700 in savings and the following debt:
$13,000 car loan
$400 jewelry card being used to establish more credit, interest free for a year.
$15,000 student loan not yet in repayment (probably summertime before it will be)
$500 vet bill that is continuous because our pet is on expensive medication.

I don't want to completely factor this in because you never know with the IRS but we are expecting a $3,000 refund.

We are torn on what to do with our current savings and what to do with the possible tax refund in regards to paying down our debt and having an emergency fund in place. We purchased the car in 2012 at 5% and we like it, so we aren't consider selling it for anything else at the moment. We paid it down pretty fast and it's still well above it's value right now.

We've been back and forth whether to apply a chunk to the car or just keep it in savings. The amount we currently have is about 5 months of monthly expenses if it were needed. I love the fact of knowing we have money sitting in the bank but at the same time, I feel like we can't truly save with debt.

[autoxer]

With your emergency fund already in place, you can focus your attention on paying down your debt. If you owe $13,000 @ 5% interest, than that car loan is costing you $54 this month in interest. I would consider putting any extra cash flow towards the car loan, unless the student loans carry a higher interest rate.

$400 jewelry card being used to establish more credit, interest free for a year.

Are you trying to repair your credit from something bad? Do you use credit cards regularly? Are you trying to establish credit for something in particular? If you are current on your car loan and student loan payments, then you probably don't need jewelry card debt to help your credit rating.

[TheKayla]

Taking on debt to build your credit is a bit unnecessary, especially since you have other debts that are doing what you had intentionally taken debt out for anyway. Are there any special circumstances? I'd just get that out of the way.

Keep 3-6 months of living expenses as an EF (dependent on how steady your jobs are) and use the rest to start paying down debt. Use the refund to do so too. What are the rates on your student loans? Are any private/unsubsidized and collecting interest right now? If they're higher than your care loan interest rate, or will be when they enter repayment, start getting that knocked down, then focus on the car. If not, do vice versa.

After that, immediately start building savings for future education, a future car replacement, etc. so you can afford as much debt as possible in the future.

[Starry436]

The CC was for my husband, other than cosigning on the car he has no other credit. My school loans highest rate I think is 6.8 and the rest are below that. But they haven't hit repayment yet but when they do it'll be $150 per month. The car was the largest purchase and would free up $350 per month if paid off so I wasn't sure at this point if we should continue to harbor the savings or put a chunk towards the car. It's paid up about 10 months ahead right now.

[TheKayla]

Are you strapped for cash where that $350 would really matter significantly? If not, start paying down the student loans. I'm assuming their not subsidized at that rate (Correct me if I'm wrong), so they are collecting interest right now, even though repayment hasn't started. If you don't have to, don't wait for repayment to be required before starting repayment. Even so, when it does start that will be your biggest chunk of debt with the biggest interest rate, with no hard value -- as much as cars depreciate in value, you'll still have some value in it. You're looking at it as $150 versus $350, but take a look at all the money you're wasting on interest between both -- it will be a lot more on those student loans -- you're paying far more on those then and it's best to clear that debt asap. I'd suggest starting right now to pay down the student loan, it makes the most mathematical sense.

[Starry436]

Four of the loans are not currently collecting interest, I only have one loan that is accruing interest right now and that is the 6.8% loan and it's for $2,000. The $15,000 is the total of my loans to date even with interest from that loan added. The others have a lower rate than that but I can't recall them.

[snafu]

I suggest you concentrate on clearing the $ 2K student loan @ 6.8% and the car loan $ 13K @ 5% to save yourself as much interest as possible. If possible change the with holdings on income tax so that you get your money instead of giving the government a free loan.

[Starry436]

All of my loans are through Nelnet. How do you pay on one loan at a time? I only see an option where you can just make a payment which then I guess is just applied to my overall accumulated interest on that loan, and then the overall total of all loans.

We're only getting a large refund this year, partly from my tuition and then getting married halfway through the year. Next year since I won't have my high tuition, we'll probably just barely make it out without owing. We're both claiming Married/0 - but where I work so little, barely any taxes are withheld and so it's like straight income added on top of my husbands.

[snafu]

Starry, perhaps get in touch with Nelnet either phone or e-mail explaining you'd like to work on paying down the specific $ 2K loan @ 6.8% interest and Loan identification number if your documentation gives information since interest is accumulating. Ask the process for directing sums, how much to principal, how much goes to interest. If you pay more than monthly requirement, can the rest of the payment go directly to principal? The whole point is to reduce the sum going to interest.

With interest going to most savings under 1%, it seems quite unfair that school loans are as high as 6.8%...almost 7%.

[TheKayla]

Starry, perhaps get in touch with Nelnet either phone or e-mail explaining you'd like to work on paying down the specific $ 2K loan @ 6.8% interest and Loan identification number if your documentation gives information since interest is accumulating. Ask the process for directing sums, how much to principal, how much goes to interest. If you pay more than monthly requirement, can the rest of the payment go directly to principal? The whole point is to reduce the sum going to interest.

With interest going to most savings under 1%, it seems quite unfair that school loans are as high as 6.8%...almost 7%.

^ Agreed, and make organized with the rest of the loans too -- their amounts and interest rates, even before payment is required. You don't want to be hit with a bigger interest rate on a larger loan that you wish you would have started knocking down before interest began collecting. Most student loans compound interest daily, meaning you'll pay interest on the interest, and the owed amount will grow every day -- thats the way all my government loans are, subsidized or not. Once you find out exactly what you owe on what, you can organize better the order in which to pay off all your debts to save the most money. Before you know them, you can't really have an accurate picture of what is the best option.

Also, as an added though, can you refinance your car to a lower rate? Have you looked into that?

[kyoko]

Starry, perhaps get in touch with Nelnet either phone or e-mail explaining you'd like to work on paying down the specific $ 2K loan @ 6.8% interest and Loan identification number if your documentation gives information since interest is accumulating. Ask the process for directing sums, how much to principal, how much goes to interest. If you pay more than monthly requirement, can the rest of the payment go directly to principal? The whole point is to reduce the sum going to interest.

With interest going to most savings under 1%, it seems quite unfair that school loans are as high as 6.8%...almost 7%.

I also agree. I had about 10 student loans, and mostly I did not consolidate. The lender will send you the statement breaking down each loan, so you will get an idea which loan is the lower amount.

There was a private student loan from Citibank and I got all other sub & unsub through Citibank, also. If I had paid extra, it was applied to the private loan, which had a highest amount. I contacted Citibank and talked them about my intention to pay down more than what was due. They gave me the other address (for an expedite repayment) and I sent a check there the extra I wanted to pay with that specific loan ( the lowest off course!) and separately made the normal payment that was due each month. Once that loan was done, moved on to the second lowest loan (adding the amount of the loan payment that was just done... and so on, and that's how I did power payments. Just like snowball method, and since all loans were the same interest ( except for the private loan and it was the biggest amount and highest interest rate), so it was easy to do this snowball.

I did not go through Nelnet, but I'm sure you can do the same thing.

[Joe Moore]

I have a personal thing about car loans. I just want to own my car outright. So, for me paying car loan would always be the first choice. Sometimes, make decisions based on their own feelings and how they see things. It may be right or wrong but makes you feel better.